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e M o r t g a g e
Technology and the Herd Mentality
W
E’VE WITNESSED THE TECHNOLO- videoconferencing for the mortgage about the van conversions you could
gy stock market bubble and industry. When all was said and done, drive, but the value-added networks
felt the pain of herd mentali- 100 percent of these investments were heavily promoted by Fannie Mae, Fred-
ty when the market crashed in the spring lost. The mentality was that videocon- die Mac and Computer Power Inc. (CPI;
of 2000. The dot-com boom and bust ferencing would replace the loan officer later bought by ALLTEL Information
were felt even closer to home with mort- and would create a whole new way of Services and then by Fidelity National
gage.com and iOwn. I think we all working with customers. The lesson Financial Inc.). Hundreds of millions of
learned some good lessons from this peri- learned was that technology isn’t going dollars were spent in this area. The
od, and I’d expect it would be decades to replace the customer relationship objective was to use a private communi-
before such a debacle would be repeated (though we know now that it can signif- cations network to carry all the products
(let’s hope, anyway). What most don’t icantly enhance it). and services that the industry uses in an
realize, though, is that the herd mentality electronic format. Each firm sought to
in mortgage technology remains alive control the electronic order and delivery
and well. of millions of transactions by the entire
The mortgage technology industry has industry.
its own trends that can be seen over the The general thought was that the
The mortgage technology
years in mini-booms and busts. For the Internet wasn’t secure enough and that
last 30 years, we’ve had numerous exam- industry has its own trends the mortgage companies and vendors
ples where a misguided herd mentality that can be seen over the years
would pay dearly to use these VANs.
drove us down the wrong path. I believe Some of the brightest minds in the
it’s important to learn from the past so we in mini-booms and busts. industry convinced top management at
don’t repeat these mistakes in the future. these firms that VANs were the solu-
Still, I have no illusions that mistakes tion every mortgage company and
similar to those that will be described industry vendor needed. Of course, the
here won’t continue in the future. Internet rolled over VANs like a steam-
I started in the mortgage technology roller over ants. I’m not even sure we
field in 1982, when I built the first loan The next example where the herd learned much other than the fact that
origination system (LOS). For the first mentality was well-demonstrated was even the largest firms can make very
several years, it was a fledgling area of with the old Accredited Standards Com- expensive mistakes.
mortgage technology with only a hand- mittee (ASC) X12 standards. Almost Workflow solutions are another
ful of companies. In the late 1980s it every mortgage technologist bought area that confused so many mortgage
became a full-fledged boom, and I recall into this idea as they saw it as the solu- company management teams. This
one Mortgage Bankers Association tion to the myriad file formats plaguing great-sounding solution seemed like
(MBA) annual convention where there the industry. Unlike some of the other just the ticket to eliminate the costly
were no fewer than 50 LOS vendors rep- fads, this one never made it main- bottlenecks and manual labor process-
resented—almost all of which were in stream. In fact, it was probably the es of mortgage origination. However,
startup mode. Those mortgage compa- technology firms themselves that were in the majority of the installations, the
nies that purchased systems from these hurt the most as they spent research cost of the technology was more than
startups learned firsthand how easy it and development (R&D) money trying the savings that resulted from its use.
was to lose a lot of money on a bad to adopt X12 standards that never Again, even the experts were stymied
technology investment. became a standard. We can see that by this technology, with so many con-
The next big boom was in videocon- even the very best technologists can fall sultants advocating the use of work-
ferencing. At its height, almost every prey to herd mentality. The good news flow applications to significantly
mortgage company was evaluating how was that what we learned with X12 reduce the high cost of loan process-
its business would be impacted by this helped tremendously with the newer i n g . A l o t o f m o r t ga g e c o m p a n i e s
new technology, and was either building and successful Mortgage Industry Stan- wrote off their investments in this
a defensive strategy or buying into this dards Maintenance Organization area, and this “hot technology” has
latest fad. At the very least, more than (MISMO) standards. faded in recent years. Another lesson
half a billion dollars was invested into Remember the VANs? I’m not talking learned was that there are no
MORTGAGE BANKING . JUNE 2004
economies of scale in loan production. c a m e o u t , t h e y we r e s o e x p e n s i ve
It’s why small mortgage brokers have ($10,000 or more) that they were more
played a growing role in the origina- costly per page than the old daisywheel
tion marketplace in the last few printers with preprinted forms. So for
decades. I’ll actually argue that a larger several years, laser printers were a bad
regional loan processing center creates investment. It wasn’t until Hewlett-
a higher cost per loan compared with Packard developed its low-cost laser
smaller local offices. printers (then costing about $3,000
There have been other such fads that each) that it began to make sense for
most mortgage offices. Sometimes you
have to wait for the technology to
mature before you can expect wide-
spread adoption—don’t jump on the
We’ve got to avoid the herd bandwagon too soon.
I believe there are some new tech-
mentality and work at making nologies being introduced to our market
our own analysis before we even today that fall into the category of
a bad investment. Yet, companies will
adopt the next new thing. be led to make these investments by
those that believe strongly they have
found a better solution. We’ve got to
avoid the herd mentality and work at
making our own analysis before we
received a lot of initial interest and adopt the next new thing.
then faded off into history. These
include the Internet transaction systems Scott Cooley is an independent mor tgage technol-
(e.g., nCommand, Xpede, NetOriginate, ogy consultant, analyst and author based in
Bridgespan), hundreds of dot-com E- Los Gatos, California. He can be reached at
LOAN imitators, mortgage rate distribu- scottmcooley@hotmail.com.
tion systems, personal digital assistant
(PDA) applications, lender application
service provider (ASP) solutions (e.g.,
Ultraprise, eCloser, Loan Trader, etc.)
and various imaging solutions.
Certainly, not all such applications
and companies have failed. There are
some success stories, but on average
there are far more losers than winners.
In general, our industry has a difficult
time separating the wheat from the
chaff. It seems that once a new idea is
developed, a ringleader then steps for-
wa r d . I n m a ny c a s e s , a h e r d t h e n
starts to follow the ringleader and
pushes for wide adoption of the new
technology. There is often a lack of
objective analysis of each new tech-
nology. In addition, there’s a bias that
just because it’s new technology, it
must be better (like workflow applica-
tions for loan processing).
I’ve seen very little testing where
true benefits are weighed against all-
inclusive costs. I used to use prototypes
with any new technology, and would
often use a stopwatch with real loan
processors. There had to be a sizable
cost savings to consider a new solution.
For example, when laser printers first
MORTGAGE BANKING . JUNE 2004
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